ECONOMY

Central bank wants to tighten credit rules, reduce bad loans

The Bank of Greece is calling on commercial banks to set up effective preventive mechanisms that would locate risks in time, so as to avoid the creation of new bad loans. The new increase in delayed loans recently, although on a small scale, has worried BoG officials. Sources suggest that the latest data show the amount of poorly serviced debts (corporate and retail banking) reaches 6.3 percent, while the picture in consumer loans is very worrying as poorly serviced debts have reached 10 percent. The current level of bad loans is considered high and the monitoring authorities’ top priority is to limit them through the adoption of stricter crediting mechanisms by banks. In other words, the BoG is asking banks to be stricter in issuing loans or banks’ systems to reject a significantly greater portion of loan applications than they do today. The central bank recommends that banks immediately upgrade their data systems and adopt stricter terms for loan issuance. Automation is a particularly effective tool, as it analyzes data (income, age, loan exposure) through standardized methods and automatically assesses the credit capacity of applicants without the intervention of the human factor which may overestimate the financial capacity of a borrower, affected by sentimental factors. The adoption of strict centralized systems and the application of specific standardized procedures following predetermined banking qualitative and quantitative criteria (which would not change from case to case) is the most efficient way to detect risks in time. Within this context, the BoG last October imposed on all banks, as a protection shield, the limitation that the total of borrowers’ debts from capital and interest must cover no more than 30-40 percent of disposable income. The BoG does not want the constant increase of bank provisions against risks; its objective is to substantially improve the banks’ portfolio, which would lead to an overall upgrade of the credit system. High provisions may safeguard the banking system from any crises, yet they are created via higher interest rates. Reliable borrowers, therefore, instead of getting rewarded with lower interest rates as they should, are burdened with higher interest rates, suffering for the sins of unreliable borrowers. In view of the adoption of the Basel II treaty, the BoG has called for the upgrade of banks’ risk management departments. These sections will gradually enjoy greater powers and it will be they which will in essence determine the policy of the banks as far as issuing loans is concerned. The processes determined by the risk department will not be overruled by anyone, not even the CEO, which is impressive, considering that just a few years ago the head of a bank, especially in the state sector, could order the approval of a multimillion-euro loan with just one phone call. From now on, any deviation or encroachment in the internal structures of operation of banks will result in serious administrative and punitive penalties. Loan explosion The biggest fear of both the central bank and the heads of commercial banks is the behavior of households and of the banking system should a depression hit the Greek economy. According to sources, the consequences of a possible depression was one of the main issues discussed by BoG Governor Nicholas Garganas and the heads of the Hellenic Banks’ Association last week. Although today’s conditions make such a prospect quite unlikely, no one knows what will happen in three or four years, let alone in an economy where credit expansion has explosive rates. Notably in the last decade, mortgage loans have increased more than 10 times, rising from 3.58 trillion euros in 1995 to over 41 trillion euros today. The picture of consumer credit is very disquieting: The consumer loans balance is at 20.5 trillion euros against 1.2 trillion euros just a few years ago. Bank officials say that historically the explosion of loans is followed by an explosion in bad debts. Additionally, the more the loan pool grows the greater chances are for new loans. An added cause of concern is the inefficient operation of the borrowers’ behavior recording system, Tiresias. Bank officials consider the Tiresias data as insufficient, ineffective and not entirely reliable. The situation in the so-called «White Tiresias» is worse; this data bank records reliable borrowers, too, so that banks can know each applicant’s real records before issuing a loan. More uncertainty stems from the fact that the liberalization of retail banking has coincided with a period of dropping interest rates. The impact of rising interest rates on the ability of households to service their debts remains unknown for the domestic banking system as well as on households themselves. The latter are not familiar with the instrument of borrowing and may have borrowed above their means. Despite all these problems, bankers consider the local banking system stronger than ever and able to respond to any hardship. In recent years, most banks, the state ones included, proceeded to a substantial clearance of their portfolios, writing off many of their bad debts. Furthermore, many local banks are making high provisions which generally cover delays. Finally, the high profits of recent years strengthen their capital base, even if this has come about thanks to extraordinary factors.